Model Risk Assessment Series

Posted: 15 October 2013 | Author: Owen Lau

The recent expansion of model development from origination to exposure valuation benefits the decision making process of the management in financial institutions, however, models also come with costs, as well as risk.

During 2008, many models returned incorrect prediction or valuation because of the wrong assumption of correlation during financial distress. Afterwards, model risk came to attention to the industry. The industry then shifted the focus from model implementation to model risk assessment. The understanding of the model risk assessment starts with the understanding of model development. Each step of the model development process has potential risks. This article focuses on the first two steps of the model development process: data collection and data cleansing. During the data collection and data cleansing process, the key risks include: